Global economy slips to slowest growth since 2008 financial crisis, OECD says

Growth weakening from 3.6% last year to 2.9% this year as trade conflicts take toll

Traders work before the closing bell at the New York Stock Exchange (NYSE) on September 20, 2019 in New York City. / AFP / Johannes EISELE

The global economic growth decelerated to slowest pace since the 2008 financial crisis, as escalating trade conflicts continue to weigh down on trade, OECD said, urging governments to use stronger fiscal policies to stimulate expansion and boost demand.

The Paris-based organisation is forecasting the world's economy to grow 2.9 per cent this year and 3 per cent in 2020 after a 3.6 per cent expansion in 2018, as the US and China trade war hurts investment, adds risk to financial markets and heightens policy uncertainty, the OECD said in its latest report on global economic outlook.
The outlook has worsened since May, when OECD estimated the global economy would grow 3.2 per cent this year and 3.4 per cent in 2020.

"The global economy is facing increasingly serious headwinds and slow growth is becoming worryingly entrenched,” OECD chief economist Laurence Boone said. “Governments need to seize the opportunity afforded by today’s low interest rates to renew investment in infrastructure and promote the economy of the future."

The OECD's warnings follows the US Federal Reserve and the European Central Bank calls to the government for fiscal stimulus packages to boost investment and kick-start economic activity. The organisation cut its forecast for most of the G20 economies in 2019 and 2020, saying that trade and geopolitical tensions fuel the risk of persistent low growth.

Uncertainty from the retaliatory tariff war between the world's two biggest economies is dragging down the manufacturing sector's growth and "persistent weakness" in the industry will hurt the labour market, household incomes and spending.

It will also continue to put a "significant drag" on global trade over the next two years and may reduce global growth by 0.3 to 0.4 percentage points in 2020. Trade tensions have shaken business confidence, leading to a drop in investment growth from nearly 4 per cent in 2017 to 1 per cent currently, according to the OECD report.

China, the world's second biggest economy, is expected to grow at 5.7 per cent in 2020, down from a May forecast of 6 per cent.

The OECD estimated that a sustained decline in domestic demand growth of 2 percentage points per year in China would result in a "significant' slowdown in global growth.

If accompanied by a deterioration in global financial conditions and heightened uncertainty, this scenario means global growth could be reduced by 0.7 percentage point per year on average in the first two years of the shock. Global trade growth could be cut by close to 1.5 per cent per year, with the strongest effects being felt in neighbouring economies in Asia.

Meanwhile in the UK, persistent uncertainty about the timing and nature of its exit from the European Union weigh on the country's economic growth prospects.

A no-deal Brexit scenario could push the UK into a recession in 2020 and reduce growth in Europe "considerably," the OECD report said.

In such a scenario,  the country's GDP could decline by close to 2 per cent in 2020 and  in 2021, the downward pressure will largely be driven by the trade and uncertainty shocks. Business investment in the UK will particularly be affected, dropping by close to 9 per cent in 2020 and consumer price inflation is likely to be pushed up by close to 0.75 percentage point in 2020 as import prices climb in the aftermath of a no-deal Brexit, according to the report.

The OECD also cited a persistent upward spike in oil prices due to supply disruptions following attacks on Saudi Arabia's energy assets and failure of policies to prevent a sharper slowdown in China as factors adding to further weakening of global growth.

The OECD said that a "collective effort is urgent" and that monetary policy must be accompanied by a "stronger fiscal and structural policy support".  It urged "greater structural reform" to help offset the impact from protectionist measures on trade and investments.

"Fiscal policy should play a larger role in supporting the economy, by taking advantage of exceptionally low long-term interest rates for wider public investment to support near-term demand and future prosperity," it said.